Global Financial Crisis and Its Impact on India

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GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON INDIA
Abstract:

The effects of the global financial crisis have been more severe than initially forecast. By virtue of globalization, the moment of financial crisis hit the real economy and became a global economic crisis; it was rapidly transmitted to many developing countries. India too is weathering the negative impact of the crisis. There is, however, an important difference between the crisis in the advanced countries and the developments in India. While in the advanced countries the contagion traversed from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector. The global financial crisis has started in August 2007 when the ‘sub-prime mortgage’ crisis first surfaced in the US. In fact, the RBI was raising interest rates until July 2008 with the view to cooling the growth rate and control inflationary pressures. But as the financial meltdown, morphed in to a global economic downturn with the collapse of Lehman Brothers on 23 September 2008, the impact on the Indian economy was almost immediate. Credit flows suddenly dried-up and, overnight, money market interest rate spiked to above 20 percent and remained high for the next month. It is, perhaps judicious to assume that the impacts of the global economic downturn, the first in the center of global capitalism since the Great Depression, on the Indian economy are still unfolding. The crisis confronted India with discouraging macroeconomic challenges like a contraction in trade, a net outflow of foreign capital, fall in stock market, a large reduction in foreign reserves, slowdown in domestic demand, slowdown in exports, sudden fall in growth rate and rise in unemployment. The global financial crisis has had three major impacts on the Indian economy: (i) the quantum of liquidity available during the first half of FY 2008-09 is about a third lower than during the first half of FY 2007-08; (ii) with slackening external demand, export growth is expected to slow; and (iii) Foreign Institutional Investors have withdrawn from Indian stock markets leading to sharp falls in key indices. The government of India has been highly proactive in managing this ongoing crisis with a slew of monetary and fiscal measures to stabilize the financial sector, ensure adequate liquidity and stimulate domestic demand. As a result of this combining with many several structural factors that have come to India’s aid, India’s economic slowdown unexpectedly eased in the first quarter of 2009. The present paper makes an attempt to assess the impact of global financial crisis on the Indian economy and describe monetary and fiscal measures taken by government of India to reduce the intensity of impacts. The paper also highlights recovery of Indian economy from crisis and in the end of paper concluding remarks are given towards.

Introduction :

Growth of real and financial sectors is essential for economic development. The financial sector has claimed an ever-growing share of the nations’ income over the past generation. The financial sector comprises institutions which promote savings on the one side and investment on the other and also includes facilitators like, stock exchanges and merchant bankers. Any imbalance in the growth of the two sectors is a cause of concern. Over the years, the financial sector has gained prominence and is a prime mover for every economy. Financial crisis, in a way, is a reflection of the imbalance between the growths of the two sectors. The present study gives, in brief, an overview of the financial crises over the years; and the origin and features of the current crisis.

METHODOLOGY

• Research study is exploratory in nature as to gain familiarity with a phenomenon –“Global Financial Crisis and its impact on Indian economy” and to achieve new insights into it....
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